GEP Value Trends Procurement Outsourcing
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GEP Value Trends Procurement Outsourcing

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Which procurement activities are larger and mid-sized companies most likely to outsource and which ones do they prefer to keep in-house? Procurement research firm ISG and GEP provide you answers and ...

Which procurement activities are larger and mid-sized companies most likely to outsource and which ones do they prefer to keep in-house? Procurement research firm ISG and GEP provide you answers and insights in a new research report on procurement outsourcing in North America and Europe.

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    GEP Value Trends Procurement Outsourcing GEP Value Trends Procurement Outsourcing Document Transcript

    • NEWRESEARCHREPORT
    • GEP Value Trends: Procurement OutsourcingThird in a Research Series on Procurement from Information Services Group and GEP September 2012 ISG research conducted in conjunction with: Copyright © 2012, Information Services Group, All Rights Reserved
    • IntroductionISG undertook a research in June 2012 in with support from GEP to provide insights to CPOs and otherProcurement executives in an effort to assist them in understanding some of the key issues facing otherprocurement organizations. Additional goals were to provide insights to steps that they might take to addresssome of these issues and to move their organizations to the next level in delivering value to their companies.Respondents to the survey were primarily based in North America with 28 percent of respondents representingother geographies. Respondents included leaders from the financial services, healthcare and pharmaceuticals,business services, manufacturing, energy, government and public sector, media and telecom, retail and traveland transportation sectors. Fifty-nine percent of respondents were from businesses of more than $5B in annualrevenue and respondents were generally CFOs, CPOs or their direct reports.The research focused on three key aspects affecting the procurement function: • Procurement Strategy: Key Challenges and Transformation Drivers • Procurement Technology and Implementation • Procurement OutsourcingIn this three part series, we bring to you insights from the research covering these three aspects, one at a time.These insights reflect the voice of numerous procurement leaders across several industries and can be aneffective tool in benchmarking your own procurement organization.In the first report, we focused on key challenges faced by procurement executives today, areas they perceive asopportunities for improvement and top priorities for procurement executives at this time. The second reportprovided insights into Procurement Technology and Implementation trends including type of procurementsoftware most actively used today, trends in procurement software adoption, trends in software deployment modeland the importance of brand in software provider selection.This report, the last in the three-part series provides insights into: • Adoption trends in procurement BPO • Procurement outsourcing drivers and preferences • Satisfaction with procurement BPO offerings • Cross-functional participation and key decision makers for procurement outsourcing • Executive relationship role in procurement outsourcing decisions and • Importance of brand in service provider selection 2 Copyright © 2012, Information Services Group, All Rights Reserved
    • Survey Approach and RespondentsRespondents to the survey were primarily based in North America with 28 percent of respondents representingother geographies. Respondents included leaders from the financial services, healthcare and pharmaceuticals,business services, manufacturing, energy, government and public sector, media and telecom, retail and traveland transportation sectors. Fifty-nine percent of respondents were from businesses of more than $5B in annualrevenue and respondents were generally CFOs, CPOs or their direct reports. It should further be noted thatrespondents tended to be from organizations that participate in forward-thinking professional societies and aretherefore likely to have a higher degree of awareness of more advanced trends in procurement. Organizationsthat do not actively participate in such societies may therefore be underrepresented in the survey. 3 Copyright © 2012, Information Services Group, All Rights Reserved
    • Procurement BPOProcurement BPO has matured significantly since the earlier focus on it as primarily an F&A activity. Increasingly,solutions have become more focused on capability growth and expansion rather than being driven by significantreplacement of internal staff to reduce the expense of procurement operations. By focusing on better managing acompany’s spend, Procurement BPO providers have been able to attract clients interested in expanding theirmanaged spend capabilities to other geographies and lines of business. The key drivers of this trend are primarilyfocused around acquiring scarce skills, improving processes and better support for internal business units. Inother research conducted by ISG we have observed significant growth in the use of Procurement BusinessProcess Services since 2008. While many companies are not currently considering Procurement BPO, we havealso observed this percentage decreasing over time as Procurement BPO becomes better understood in themarketplace.Currently, Contract Management and Transactional Procurement have a higher adoption rate for procurementBPO with 14 percent of respondents reporting that they have fully implemented these services. Procurement BPO Adoption Trends Current Planned 14% 24% Contract Management Transactional Procurement 9% 53% 14% 21% Transactional Procurement Contract Management 9% 56% 12% 20% Spend Analysis Spend Analysis 11% 57% 7% 18% Sourcing Sourcing 16% 59% 7% 18% Vendor Management Vendor Management 5% 70% Fully implemented Currently implementing Considering implementing Not considering implementing Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012 n = 57 # To what level has your organization implemented the following procurement BPO activities? 4 Copyright © 2012, Information Services Group, All Rights Reserved
    • We observed considerable similarity in adoption of various procurement BPO solutions by industry, notably asignificantly lower use of vendor management in financial services, healthcare and pharmaceuticals andmanufacturing. Procurement BPO Adoption Trends by Industry Financial Services (n = 18) Healthcare & Pharmaceuticals (n = 10) Spend Analysis 11% 11% 0% 78% Spend Analysis 20% 10% 10% 60% Contract Management 22% 0% 17% 61% Contract Management 20% 0% 10% 70% Vendor Management 11% 6% 11% 72% Vendor Management 0% 10% 90% Sourcing 6% 6% 23% 65% Sourcing 0% 20% 20% 60% Transactional Procurement 5% 0% 28% 67% Transactional Procurement 30% 10% 10% 50% Business Services (n = 10) Manufacturing (n = 6) Spend Analysis 10% 20% 20% 50% Spend Analysis 0% 33% 67% Contract Management 10% 30% 10% 50% Contract Management 0% 16% 17% 67% Vendor Management 10% 10% 20% 60% Vendor Management 0% 17% 83% Sourcing 10% 10% 20% 60% Sourcing 16% 17% 0% 67% Transactional Procurement 30% 0% 20% 50% Transactional Procurement 0% 33% 0% 67% Fully implemented Currently implementing Considering implementing Not Considering implementing Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012 # To what level has your organization implemented the following procurement BPO activities?Third party procurement management services (Procurement BPO) are increasingly being adopted for a variety ofreasons. Chief among them is improved focus on sourcing and other subject matter expertise, followed by bestpractice processes to better support the business. Adding capacity was also relatively highly ranked, butachieving savings through labor arbitrage was a relatively weaker driver. This is consistent with trends that wehave seen in the industry, where procurement BPO is primarily being implemented as a method to improve orexpand capabilities. While organizations are certainly focused on managing their costs of delivery of theseservices, the net trend is one of investment in procurement, with an increasing tendency to buy vs. build additionalcapabilities. 5 Copyright © 2012, Information Services Group, All Rights Reserved
    • We also looked at preferences in the types of service providers being used to deliver Procurement BPO. Ingeneral, the greatest percentage of buyers preferred multifunction service providers who provide procurementand other services. We saw clear patterns emerge depending upon whom in the organization we asked and whattheir primary priorities were. Those who leaned toward multifunction providers tended to have a higher focus onreducing the cost of procurement and a lower focus on achieving sourcing savings. Procurement specialistproviders were the clear preference among respondents who ranked the achievement of sourcing savings high.The chief driver among CPOs was adding staff/capacity, while the chief driver at the manager level was processbest practices.The following series of graphics highlights the procurement outsourcing drivers and preferences of respondentsaccording to their organizational size, role and industry segment. Procurement Outsourcing Drivers and Preferences Drivers Improved focus and skills needed on sourcing and other subject 23% matter expertise Need for process best practices to better support business 23% Adding capacity to existing team vs. hiring 21% Savings in resource costs/labor arbitrage 19% Accelerate sourcing savings 14% n = 57 Preferences Multi-function service providers who support procurement and 37% other business functions as well Provider of procurement software and services 23% Provider of procurement software and services as well as multi- 20% function service providers Provider of just procurement services 20% n = 56 Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012 # Which of the following would best describe how your procurement organization considers value in procurement outsourcing? # If you were to consider a procurement BPO provider, who would you prefer? 6 Copyright © 2012, Information Services Group, All Rights Reserved
    • What were the drivers behind these preferences? Provider of procurement software and services as well Provider of just procurement services as multi-function service providers Savings in resource costs/labor arbitrage 37% Adding capacity to existing team vs. hiring 28% Accelerate sourcing savings 36% Improved focus and skills needed on sourcing and other subject matter expertise 27% Need for process best practices to better Adding capacity to existing team vs. hiring 18% support business 18% Improved focus and skills needed on Accelerate sourcing savings 18%sourcing and other subject matter expertise 9% Need for process best practices to better Savings in resource costs/labor arbitrage 9% support business 0% Multi-function service providers who support Provider of procurement software and services procurement and other business functions as well Need for process best practices to better Improved focus and skills needed on 38% sourcing and other subject matter expertise 33% support business Need for process best practices to better Adding capacity to existing team vs. hiring 31% support business 24% Improved focus and skills needed onsourcing and other subject matter expertise 15% Savings in resource costs/labor arbitrage 24% Savings in resource costs/labor arbitrage 8% Adding capacity to existing team vs. hiring 14% Accelerate sourcing savings 8% Accelerate sourcing savings 5% n = 56 Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012 # Which of the following would best describe how your procurement organization considers value in procurement outsourcing? # If you were to consider a procurement BPO provider, who would you prefer? 7 Copyright © 2012, Information Services Group, All Rights Reserved
    • Outsourcing Drivers and Preferences by Organizational Role Drivers by Organizational Role Preferences by Organizational Role 0% 17% Savings in resource cost/labor Multi-function service providers who 24% arbitrage support procurement and other 36% 21% business functions as well 42% 14% Need for process best practices to 12% support business Providers of procurement software 50% 37% and services as well as multi-function 12% service providers 21%Improved focus and skills needed on 14% sourcing and other subject matter 28% expertise 17% 0% n = 56 Provider of procurement software 24% and services 43% Adding capacity to existing team vs 29% 16% hiring 21% 33% 29% Provider of just procurement 28% Accelerate sourcing savings 20% services 8% 4% CPO VP/Director Manager/Staff CPO VP/Director Manager/Staff n = 56 Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012 # Which of the following would best describe how your procurement organization considers value in procurement outsourcing? # If you were to consider a procurement BPO provider, who would you prefer? 8 Copyright © 2012, Information Services Group, All Rights Reserved
    • Outsourcing Drivers and Preferences by Organizational Size Drivers by Organizational Size Preferences by Organizational Size 14% Accelerate sourcing savings 18% Provider of just procurement 14% services 24% Improved focus and skills needed 14% on sourcing and other subject matter expertise 34% 25% Provider of procurement software and services 19% Need for process best practices to 21% better support business 19% Multi-function service providers 36% who support procurement and other 27% business functions as well 33%Adding capacity to existing team vs. hiring 19% Provider of procurement software 21% Savings in resource costs/labor 24% and services as well as multi- arbitrage function service providers 24% 14% $1 B - $10 B > $10 B n = 50 $1 B - $10 B > $10 B n = 50 Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012 # Which of the following would best describe how your procurement organization considers value in procurement outsourcing? # If you were to consider a procurement BPO provider, who would you prefer? 9 Copyright © 2012, Information Services Group, All Rights Reserved
    • Outsourcing Drivers by Industry Savings in resource costs/labor arbitrage 22% 30% 20% 33%Need for process best practices to better support 17% 10% 60% 17% business Adding capacity to existing team vs. hiring 28% 20% 10% 33%Improved focus and skills needed on sourcing and 17% 30% 10%0% other subject matter expertise Accelerate sourcing savings 16% 10% 17% 0% Financial Services (n = 17) Healthcare & Pharmaceuticals (n = 10) Business Services (n = 10) Manufacturing (n = 6) Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012 # Which of the following would best describe how your procurement organization considers value in procurement outsourcing? Outsourcing Preferences by Industry Multi-function service providers who support 22% 20% 50% 50% procurement and other business functions as well Provider of procurement software and services 28% 20% 20% 33% Provider of just procurement services 22% 50% 10% 17% Provider of procurement software and services as 28% 10% 20% 0% well as multi-function service providers Financial Services (n = 18) Healthcare & Pharmaceuticals (n = 10) Business Services (n = 10) Manufacturing (n = 6) Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012 # If you were to consider a procurement BPO provider, who would you prefer? 10 Copyright © 2012, Information Services Group, All Rights Reserved
    • The majority of respondents with experience with Procurement BPO were satisfied with the services that theyreceived, with less than 10 percent expressing dissatisfaction with any service except contract management,where dissatisfaction levels were 18 percent. Satisfaction with Procurement BPO offerings Are buyers Satisfied? 82% Spend Analysis (n = 11) 9% 9% 75% Transactional Procurement (n = 12) 8% 17% 71% Vendor Management (n = 7) 0% 29% 55% Contract Management (n = 11) 18% 27% 55% Sourcing (n = 11) 9% 36% Satisfied Dissatisfied Cant say Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012 # If you answered ‘fully implemented’ or ‘currently implementing’, how satisfied are you with the service offerings currently provided by the procurement BPO providers? 11 Copyright © 2012, Information Services Group, All Rights Reserved
    • Companies considering procurement BPO consistently indicated a high degree of cross-functional collaboration inselecting a solution. This is consistent with the more general need for procurement to be collaborative withmultiple stakeholders so it can be successful in driving adoption and savings across the corporation. Therefore itis not surprising to see procurement involving other stakeholders in the decision to select a BPO solution.Cross-functional participation is evident across large and middle-sized organizations, with a business unit playingthe primary decision-maker role among larger organizations, while procurement function assuming this roleamong the middle-sized ones. 12 Copyright © 2012, Information Services Group, All Rights Reserved
    • The CFO or CPO is the primary decision maker for procurement outsourcing at 57 percent of respondentorganizations, with 14 percent reporting their CEO is the decision maker. In all three of these cases a commondriver is presumably driving financial impact to the bottom line. However, beyond this common interest, it isimportant to note that CFOs are highly focused on financial controls, financial transparency and risk, whereasCEOs are often focused on acquiring strategic capability, enhancing organizational agility and improving theenterprise’s ability to support entry into new markets or geographies. CPOs tend to be motivated by the need tosolve their capability challenge, in other words, pursuing strategies to accomplish the strategic and operationalmandate assigned to procurement with finite resources. 13 Copyright © 2012, Information Services Group, All Rights Reserved
    • It is also worth noting that CPOs in larger enterprises (with greater than $10B in revenue) have a much largerdegree of influence on decisions to employ procurement BPO. This suggests to us that within larger organizationsCPOs have a higher degree of awareness and sophistication regarding procurement BPO than their counterpartsat smaller organizations. We have also observed that in some cases, smaller organizations do not yet have aformal CPO role. 14 Copyright © 2012, Information Services Group, All Rights Reserved
    • Procurement Outsourcing Decision-making by Organizational Size 17% President/CEO 14% 42% CFO 29% 14% CPO 38% 10% COO/CAO 9% 0% CIO 10% 7% Corporate Strategy 0% 10% Director/Senior Manager 0% $1 B - $10 B > $10 B n = 50 Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012 # At what level of the organization would a decision to consider procurement outsourcing likely to be initiated?It is also interesting to note that in some industries, including business services and healthcare, CPOs have amuch more limited degree of interest than in others, such as financial services, and especially manufacturing,where it is more common for the CPO to be a true “C-Level” executive reporting to the CEO. 15 Copyright © 2012, Information Services Group, All Rights Reserved
    • Procurement Outsourcing Decision by Industry Financial Services (n = 18) Healthcare & Pharmaceuticals (n = 10) CFO 33% CFO 60% CPO 22% CPO 10% President/CEO 11% President/CEO 0% COO/CAO 17% COO/CAO 20%Director/Senior Manager 0% Director/Senior Manager 10% Corporate Strategy 6% Corporate Strategy 0% CIO 11% CIO 0% Business Services (n = 10) Manufacturing (n = 6) CFO 40% CFO 33% CPO 10% CPO 50% President/CEO 10% President/CEO 17% COO/CAO 0% COO/CAO 0%Director/Senior Manager 20% Director/Senior Manager 0% Corporate Strategy 20% Corporate Strategy 0% CIO 0% CIO 0% Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012 # At what level of the organization would a decision to consider procurement outsourcing likely to be initiated? 16 Copyright © 2012, Information Services Group, All Rights Reserved
    • Given the degree of change management and cross-enterprise coverage typically associated with procurementBPO, executive relationships and brand reputation were potentially critical differentiators for clients whenselecting a provider. In fact, this is the case with a minority of clients; 28 percent of respondents believe thatexecutive relationships are very important in considering or executing a BPO deal. However, approximately thesame percentage indicated that executive relationships were not important, and 44 percent saw executiverelationships as a factor, but not an overriding factor, in procurement BPO decisions. It is also worth noting thatthe higher the level of the respondent in the survey, the less likely they were to indicate that executiverelationships were the primary decision factor, and that there was no significant variation in this trend betweenlarger and smaller companies. Interestingly, we did see significant variation in responses by industry, withfinancial services showing a relatively low level of importance on this factor, and manufacturing andhealthcare/pharmaceuticals showing a much higher degree of importance. This suggests that despite the lack ofexisting executive relationships, smaller providers will have a reasonable opportunity to compete for business inthe majority of opportunities in the broader marketplace, but that providers may be inclined to test the waters inqualifying pursuits in some industries. From a buyer perspective, this underscores the importance of an effectivelymanaged sourcing process to ensure a level playing field for competition. 17 Copyright © 2012, Information Services Group, All Rights Reserved
    • 18Copyright © 2012, Information Services Group, All Rights Reserved
    • Importance of Executive Relationships by Organizational Size 28%Not important, the capabilities of the provider are most important 31% 43% Important but other factors such as suppliers brand, reputation and capability also matter 41% 29% Very important in considering/executing a deal 28% $1 B - $10 B > $10 B n = 50Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012# Executive relationships between a software/service provider and my company’s leadership is: 19 Copyright © 2012, Information Services Group, All Rights Reserved
    • Importance of Executive Relationships by Industry 0% Manufacturing (n = 6) 50% 50% 20% Business Services (n = 10) 50% 30% 20% Healthcare & Pharmaceuticals (n = 10) 40% 40% 45% Financial Services (n = 18) 33% 22% Not important - the capabilities of the provider are most important Important but other factors such as suppliers brand, reputation and capability also matter Very important in considering/executing a dealSource: ISG Procurement Technology and Outsourcing Trends Survey March 2012# Executive relationships between a software/service provider and my company’s leadership is: 20 Copyright © 2012, Information Services Group, All Rights Reserved
    • Brand appears to be a more of a contributing factor to software/service provider selection than a major one, with40 percent of respondents indicating that brand was of minimal importance and only 7 percent listing it as themost important criteria, with the results being similar across large (revenues > $10B) and middle-sized (revenuesof $1-$10B) enterprises. The higher the organizational level of the respondent, the less that the respondentconsidered brand to be a major factor For example, 57 percent of CPOs said brand is of minimal importance forservice provider selection and none said it was the most important criterion, while at the manager level 15 percentof respondents perceived brand to be the most important criterion and only 29 percent said it is of minimalimportance. Among verticals, brand importance was ranked lowest by the manufacturing sector and wassomewhat higher in financial services and healthcare/pharmaceuticals. 21 Copyright © 2012, Information Services Group, All Rights Reserved
    • Importance of Brand by Organizational Role 57%Brand is of minimal importance in the selection of 44% a software/service provider 29% 43% Brand is important,but other factors also matter 52% 58% 0%Brand is the most important factor in the selection 4% of a software/service provider 13% CPO VP/Director Manager/StaffSource: ISG Procurement Technology and Outsourcing Trends Survey March 2012 n = 57# Please describe the importance of Brand in the selection of a procurement software/service provider 22 Copyright © 2012, Information Services Group, All Rights Reserved
    • Importance of Brand by Organizational Size 41% Brand is of minimal importance in the selection of a software/service provider 33% 55%Brand is important, but other factors also matter 57% 4% $1 B - $10 BBrand is the most important factor in theselection of a software/service provider > $10 B 10% n = 50Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012# Please describe the importance of Brand in the selection of a procurement software/service provider 23 Copyright © 2012, Information Services Group, All Rights Reserved
    • Importance of Brand by Industry 50% Manufacturing (n = 6) 50% 0% 50% Business Services (n = 10) 30% 20% 20%Healthcare & Pharmaceuticals (n = 10) 70% 10% 22% Financial Services (n = 18) 78% 0% Brand is of minimal importance in the selection of a software/service provider Brand is important,but other factors also matter Brand is the most important factor in the selection of a software/service providerSource: ISG Procurement Technology and Outsourcing Trends Survey March 2012# Please describe the importance of Brand in the selection of a procurement software/service provider 24 Copyright © 2012, Information Services Group, All Rights Reserved
    • ConclusionWe will continue to provide research into the increasingly dynamic procurement space. • The relatively high degree to which Procurement organizations’ operations are in line with the industry standard practices suggest a significant opportunity to take advantage of standardized solutions in the marketplace. • While Procurement BPO adoption remains relatively low, significantly increased adoption over the past few years suggests that we may be at an inflection point in the industry, and that we may see significant growth in this sector moving forward. • The CFO’s office is the powerhouse for procurement outsourcing decisions; however cross-functional participation is very high. • Evaluating providers in the market followed by RFP execution is the most sought after vendor evaluation approach. • Procurement organizations are increasingly looking for additional capacity, along with specialized skills, subject matter expertise and process best practices from procurement service providers, and have modest expectations for reductions in procurement operational costs. Procurement BPO is clearly becoming primarily a capability strategy, and it is likely that this is the cause of increased interest in this sector. • The market for procurement service providers has become increasingly complex, and most buyers have a limited familiarity with the range of solutions available. Buyers should seek additional insights and subject matter expertise to ensure that they have a full understanding of their options in both delivery models and service providers prior to finalizing their solution strategy. 25 Copyright © 2012, Information Services Group, All Rights Reserved
    • For More InformationIf you would like more information about GEP products and solutions, please visit www.gep.com or contact us atinfo@gep.comClark, NJ, USA London, UK Mexico City, Mexico São Paulo, Brazil+1 732-382-6565 +44 (0)20 3008 7471 (52) 55 4777-2251 55 11 2787 6393Prague, Czech Republic Mumbai, India Hyderabad, India Shanghai, China(420) 233 025 400 91 (22) 6137 2100 91 (40) 4004 4212 86 (21) 6122 1238About GEPGEP is a diverse, creative team of people passionate about procurement. We invest ourselves entirely in ourclient’s success, creating strong collaborative relationships that deliver extraordinary value year after year. Wedeliver practical, effective procurement services and technology that enable procurement leaders to maximizetheir impact on business operations, strategy and financial performance. Named a category leader in procurementoutsourcing by the Black Book of Outsourcing, a Star Performer in Everest Group’s Peak Matrix of serviceproviders, and to the Supply & Demand Chain Executive 100 for seven years, GEP is also ranked as one of theFastest Growing Technology Companies in Deloittes Technology Fast 500. Clark, NJ-based GEP has eightoffices and operations in North and South America, Europe and Asia. To learn more, please visit www.gep.com.Unauthorized copying, distribution or re-printing in part or whole, without the written permission of GEP is strictly prohibited. 26 Copyright © 2012, Information Services Group, All Rights Reserved